Taxing Issues: Had enough about gift taxes? Or one more time?

The gift tax discussion is like the Energizer Bunny. It goes on, and on and on. At first, it was just a primer on who is required to file, etc. But the deeper we look, it has many other twists and turns.

For instance, if you help your child or another person with rental payments and other types of support, is that a gift? If the child or other person is an adult, the living expenses can be construed to be a gift, so careful consideration should be given to the type of help that is required.

In the event educational or medical assistance is needed, payments should be made directly to the provider, and they will not be considered as part of the annual exclusion. Necessary medical expenses such as home improvements or for home care attendants will be allowed and not taxable. Paying another’s long-term insurance, within limits, will be another type of payment that can be made without affecting the annual exclusion.

Is advancing a down payment to your children to buy their own house a gift? There is no correct way to do this, but it has to be done smartly with the tax gift looming in the background. In this case, both parents can gift up to $28,000 to each of the prospective homeowners, your son or daughter and their spouses for this purpose, which will then be $56,000. Or should you just gift the $28,000 to your child alone and not to their spouses? As a divorce attorney indicated, these gifts would be non-marital property in the event of a divorce and would be sole and separate property.

How about the parents buying the house outright and turning it over to the children? In this case the parents could gift off ownership in the house equal to the gift exclusion on an annual basis. In the meantime they charge the child a nominal rent so that they may get some tax benefits. Eventually, the child owns the entire home, and no gift tax has been incurred.

A direct loan to a family member should be evidenced by a promissory note stating an applicable rate of interest. This minimum rate should coincide with the appropriate Treasury note for long-term loans defined as those lasting more than nine years, and monthly payments are required. If you are the borrower, however, there is no maximum rate stipulated by the government, but prudence dictates that the interest should be what a local bank would charge. Under this borrower-lender scenario, the government cannot attack the legality of the excess over the annual exclusion.

How about gifting the annual exclusion of $14,000 per child to a Section 529 educational savings plan to help save for their own college education? These accounts are not deductible and accumulate tax free earnings over the years in existence. These qualified tuition programs are designed to cover tuition, supplies, books, room and board, and various fees. The distributions from these accounts are not taxable up to the extent that they cover the educational costs. Once again, these payments do not preclude the annual exclusion gifts.

A gift of stock in a closely held corporation can hold potential problems if challenged by the IRS as to its true value. An argument can be made that it was discounted as to the lack of marketability; lack of control in the company etc. can be used as an offset.

In all cases, gift tax returns should be filed to protect the statute of limitations. After three years, the IRS cannot audit them.

Observation: Thrift is a wonderful thing-and who hasn’t wished their ancestors had practiced it more?

Edward J. Loughrey, CFE, EA, LPA, may be reached at ejltaxes@gmail.com or at 843-705-7258.

Comments are welcome, so long as they are civil. A Facebook account is required. Abuse may result in the commenter being permanently blocked. Personal attacks are strictly prohibited. We reserve the right to remove any comments at any time.